How to Avoid Being the Victim of Auto Loan Rip-Offs

It’s not easy being a car buyer. Unless you have the privilege of paying cash for a vehicle, you’re probably going to have to finance it — either with a private lender or through a car dealership.

Unfortunately, some car dealerships have a reputation for sticking their customers with predatory auto loans strapped with extremely high interest rates. The good news is there are ways to protect yourself from being taken advantage of by a dealership when acquiring an auto loan.

Government Pushes to Stop Predatory Auto Loans

Predatory lending has long been an issue for consumers hoping to make big-ticket purchases such as homes or cars. There seems to always be a company awaiting an opportunity to take advantage of unsuspecting buyers.

But what is predatory lending? Basically, it’s unfair or fraudulent practices some lenders use during the loan origination process.

This unsatisfactory form of lending reached its peak shortly before the financial crisis. But while most of the attention was focused on subprime mortgages, car buyers faced their own struggles with predatory lending.

This oversight was to come from the Consumer Financial Protection Bureau (CFPB), which was formed to regulate consumer financial products and services.

Since getting its start, the bureau has cracked down on banks, credit card companies, credit bureaus and mortgage lenders. But auto dealerships have been exempt from the agency’s oversight.

The CFPB planned to change dealerships’ ability to evade the law by suing associated banks that finance predatory auto dealer loans.

It also said in early 2013 that dealerships were using the “dealer markup” when they acted as middlemen between car buyers and auto lenders. In these cases, customers received higher rates despite their satisfactory credit histories.

The bureau found this strategy was used disproportionately with minority buyers, who were charged higher interest rates than Caucasian borrowers with similar financial backgrounds.

Officials believe suing the lenders working with dealerships will prevent dealerships from financially benefiting from the “dealer markup.” It could also address the racial lending discrimination that is inherent in predatory lending deals.

4 Signs of Predatory Auto Loans

While there are presently no predatory lending laws on the books for the auto industry, there are ways to protect yourself from becoming a victim. One of the first steps is recognizing the signs of predatory auto loans.

It’s not always easy for consumers to know when an auto dealer is attempting to issue a predatory loan. Here are a few signs to help you recognize when you could become a victim:

1. Being Told False Information is OK

If the dealership encourages you to add false information to your loan application to help you secure an auto loan, this is a clear sign that you are working with a predatory lender.

3. “Bad Credit? No Problem!” Ads

Very often, predatory lenders will target individuals with poor credit by displaying “Bad credit? No problem!” ads. What they don’t share about these poor credit auto loans is that the rates offered are often considerably higher than what would normally be offered to borrowers with the same credit scores.

4. “Yo-Yo” Sales

If you are working with a lender that tries to convince you to enter into a conditional sale agreement rather than a final sale, this is a major sign of predatory lending. In this case, a dealer will send you home with the car, then call you back a few days later to say that your loan wasn’t approved.

It might ask you to renegotiate your loan and, to ensure you don’t try to back out of the deal, tell you your down payment is nonrefundable or your trade-in has already been sold.

How to Avoid Predatory Loans

If you are concerned about becoming a victim of predatory lending, it’s important to arm yourself with some ways to avoid predatory loans altogether:

1. Work With Reputable Financial Institutions

One of the best ways to ensure you don’t become a victim of predatory lending is to work with banks and credit unions that have good reputations for issuing auto loans in your area.

2. Research Reputable Dealerships

If you want to take advantage of cash-back bonuses or low-interest financing offers, then you might want to opt for a dealership over a financial institution. Before doing this, research consumer reviews online, check with the Better Business Bureau and even ask around town to find out the lending history of the dealership.

3. Understand Your Credit Score’s Value

One reason predatory lenders are able to take advantage of consumers is they know that many people don’t understand the value of their credit scores. Check your FICO credit score before visiting any lenders, then research your scores to learn the rates to which you are entitled. This will help you recognize when you’re being overcharged.

4. Recognize Your Personal Power

If you feel that you are being pressured to sign a contract that you’re not comfortable with, leave the dealership. This way, you won’t agree to a deal that could destroy you financially.

There’s nothing worse than realizing that you’ve been pressured to take a predatory auto loan that you’re now unable to back out of. Before signing your name on the dotted line of any auto loan contract, take time to think through your decision carefully and make sure you’re not being taken advantage of.

We would love to hear your comments and feedback

mrqpros

Thank you for the article, Stacey. To be sure, as in ANY industry, there are automotive dealerships that operate unprofessionally; however, to suggest that dealerships are all but unregulated by the CFPB is disingenuous. According to an editorial by National Automobile Dealers Association president David Westcott (http://nada.org/MediaCenter/ChairmansColumn/chairmans_column_07-2013.htm), the CFPB wields itself unfounded authority over dealers, citing a similar position as yours, Stacey: “People of color (may) statistically pay an average median interest rate than the general market, referred to by the CFPB as ‘disparate impact.'” Accurate or not, the assertion is troubling at every level. If dealers pass along interest rates as dictated by a third party lender to an individual buyer (which is almost always the case), and the lender’s only basis for the rate is credit score / history (because race isn’t allowed to be collected on a credit application), it only becomes a racial issue when the CFPB (or you for that matter) inject race INTO it in hindsight.

The consumer still has ultimate control, as you stated in your article (Point #4 (b) above), and not just to walk away from the dealership, or bank, or jewelry store, if there is a sense of predatory activity… if you improve your credit score by making payments on time, watching your debt-to-income ratio, and generally avoiding bad decisions, you will become a more empowered buyer on every level.

dellad

is there any way out of a 14month old 24% interest dealer new Kia loan?